If you've done any research at all into getting a loan to help you buy a house, aka a mortgage, then you've likely encountered some confusing terms. You usually don't need to look further than a bank, credit union, or mortgage lenders' site to see that there's a plethora of loan types available.
Adjustable, fixed rate, jumbo, balloon, government-issued, FHA or VA - the list goes on. Since most of these terms are unique to mortgage lending, it can be difficult to understand what the differences are. Although they're all used to buy a house, each mortgage type will have a different impact on your finances and by extension your life. What are the 4 types of mortgage loans? Let's get into it!
First Things First: Government Or Conventional?
Mortgages in the U.S. are backed, or held, by the U.S. government OR by an organization or company (usually a financial institution).
Government-insured mortgages include FHA (Federal Housing Administration), VA (Veterans Affair) or USDA (United States Department of Agriculture). The government issues these mortgages to help and incentivize certain groups, like veterans or those living in a rural area, to buy a home. The advantages (and disadvantages) of government-insured loans vary greatly, and it's important to understand that not every government-loan is available to every individual. If you're interested in buying a home, then an experienced mortgage lender should be able to explain what (if any) government loans may be right for you AND what it could mean for your financial situation down the road.
Note: Borrowers can still apply for government-issued mortgages with banks, credit unions, and mortgage companies. You do not need to apply for a VA, FHA, USDA or other government-insured mortgage directly with the government. Because WaFd Bank does not sell our loans to other banks or the government, meaning all the mortgages that we make stay on our books, we do not offer government-issued mortgages.
Conventional mortgages refer to loans that are not backed by the federal government.
Many banks or credit unions that issue mortgages to borrowers sell their conventional mortgages on the “secondary market”. Not the case at WaFd Bank.
We're one of the region's few portfolio lenders. If you get a loan with us, you can trust that money is staying right here - in our communities. Why does that matter? Because we are a portfolio lender, we're not constrained by someone else's lending requirements, so we can make common-sense decisions when it comes to your loan. This means greater flexibility in the types of homes and properties we're able to finance and more transparency for our borrowers. Plus, you'll know exactly who to call with questions.
The Big Two - Adjustable Rate And Fixed Rate.
When you first apply for a loan, choosing an adjustable rate or a fixed rate mortgage will be one of your first decisions.
Fixed-rate mortgages have the same interest rate throughout the life of the loan. So if you have a 30-year fixed-rate loan, then your monthly payment will only change if things like property taxes and homeowner's insurance premiums change, which usually doesn't change much year to year. Pretty straightforward. The benefits of fixed-rate mortgages are fairly self-explanatory - you'll know exactly how much your payment will be until your loan is paid off. You could pay for that stability - fixed-rate mortgages do generally come with a higher interest rate, a burden for some first-time buyers.
Adjustable-rate mortgages (ARM) are a little trickier. Unlike a fixed-rate loan, payments for an ARM can move and up and down as the lender's interest rate fluctuates, which could increase or decrease your monthly payment. As a general rule, most lenders adjust their interest rate based on the Federal Reserve's interest rate and market conditions. ARMs usually have an initial fixed-rate period during which your rate can't change, followed by a longer period during which your rate can change at preset intervals.
Most ARMs have a maximum range that your interest rate can fluctuate, called a cap. Say this cap is 2%—that means if your initial interest rate is 5%, the lowest your interest rate can ever go is 3% and the highest your interest rate will ever be is 7%. Check with the lender to find out details on the cap structure they offer, as there are annual life-of-the-loan caps. One limits changes to your interest rate in any given year, and the other limits changes that can be made while you have that mortgage (there is always the option to refinance to a fixed rate loan later).
When you're looking at mortgage products, ARMs usually include some numbers before them. For example, a 5/1 ARM is a typical product. This means that your rate won't change for 5 years, which is considered the introductory period. The "1" means that the interest rate can change every year after that up to a certain amount.
Why get an ARM? This could be a better option for you depending on your financial situation than a fixed rate, at least at first. Generally the initial rate is lower than a fixed rate, BUT since you can't predict future rates, you won't know for certain what you'll be paying in the future. Work with your mortgage lender (or one of our knowledgeable loan officers) to crunch the numbers to see what will work for you!
Other Mortgage Types
Balloon loans allow you to make interest-only, or near interest-only, payments for a period of time, usually 3 or 7 years, before requiring that the full loan amount be paid or refinanced into another loan.
Jumbo loans are just that, loans of a high amount that exceed the conforming loan limits established by Fannie Mae and Freddie Mac. Because most lenders that issue these types of loans often can't resell them on the secondary market, the interest rate is usually higher, as the risk for the issuer is greater.
If you want to learn more, The Consumer Finance Protection Bureau (CFPB) offers a helpful site: Understanding loan options.
WaFd Bank Is Here To Help
Whether you're looking to create a monthly budget for the first time, buying a home or refinancing, your neighborhood branch is here to help. Happy hunting!
All WaFd Bank loans are subject to credit approval and acceptable appraisal if applicable.
